Who Owns REI?

It can't be the members. They aren't even privy to what the co-op's executives earn.

I am REI member No. 348240, all juiced up for another unsupervised spending spree at Seattle's premier purveyor of yuppie outdoor gear, annual dividend check burning a hole in my pocket.

REI CEO Dennis Madsen: "We are a retailerfirst and foremost," and then a co-op. "Co-ops that forget that are the ones that tend to get into trouble."

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In 30 years of membership I've squandered $8,094.67 at the co-op my basement is a boneyard of recreational paraphernaliabut, incredibly, there are a few items here I haven't yet acquired. Like this pocket-sized Breath of Life oxygen kit, $169.95, the ideal alpine pick-me-up. Or this 8-ounce can of Counter Assault Bear Deterrent spray, $37.95, ready to spew out a 30-foot cone of pure pain. (Do ya feel lucky, Mr. Grizzly? Well do ya, punk?) Or, for a mere $429, this Suunto X-6 HR wrist computer that will gather gobs of indispensable dataheart rate, elevation, even time of dayand upload it to the Internet "for analysis."

Next week is the 65th birthday of Recreational Equipment Inc., and REIalready the nation's leading outdoor-equipment outlet and largest retail cooperativeis poised for the biggest growth spurt in its history.

My plan today is to piss away the $79.15 rebate REI kicked back from last year's $967.06 spending orgy and then embark on a fact-finding mission. For at least 15 years, as the gear selection here has become increasingly pricey and superfluous, I've been wondering, How come they carry chocolate-covered cherries but no inexpensive parkas? And as the number of REI locations has climbed from a single Seattle store to 66 outlets in 24 statesfour new ones last year and seven or eight more scheduled for 2003I've been thinking, How is opening a new shop in suburban Chicago going to help the folks in Seattle whose business and loyalty built this co-op?

Most of all, I've wanted to know whether the 2.1 million active memberspurported owners of this $735 million- a-year businesshave even a remote say in the way it is run. In other words, Do the members really own REI? And if not, Who does?

THE OBVIOUS STARTING point in this unofficial inquiry is REI's voluptuous flagship store, at John Street and Yale Avenue North. I want to talk with employees. I mean, if I really own a piece of this business, then I'd like to know how the company is treating people in my name. Today I've hooked up with Wayne Colwell, 49, a friendly guy who helped set up the co-op's new outfitting program.

Colwell is the kind of contented worker company officers like to point to as an example of why REI has been named to Fortune's list of the "100 Best Companies to Work For" for six years running. One of only nine companies to make the Fortune 100 list every year since its inception, REI ranked 73rd this yearbehind local stars Microsoft and Starbucks, but ahead of Nordstrom, law firm Perkins Coie, and Washington Mutual. REI's score was based on a random survey of 250 of its 6,000 employees and on the company's response to specific questions about corporate culture, policies, and practices.

While the base annual salary for the co-op's most common white-collar job, inventory analyst, is $46,342, Fortune reports, base pay for an hourly sales specialist is only $15,704. The average hourly starting wage is $7.70increasing to just $9 an hour after five years' employment. That's at least $2 to $3 below the scale earned by unionized retail workers with half the time on the job, says Todd Crosby, an organizer for United Food and Commercial Workers Union Local 1001. (As a matter of comparison, nonunion Dick's Drive-In Restaurants, another Seattle institution, pays a starting wage of at least $8.25 per hour; with merit raises, the hourly rate goes to $9 to $10 per hour within two years.)

Outfitter Colwell says the co-op's vaunted benefit packagefull health, life, and disability insurance; retirement/ profit sharing; a work performance incentive plan; discounts on merchandise; and tuition reimbursementis what keeps him working there. But union organizer Crosby says the monetary value of REI's benefits is certainly not enough to offset the company's low wages. The UFCW, he adds, would welcome inquiries from REI employees interested in organizing their own union shop.

In a slick brochure promoting the company's cultureREI: Where professional growth blends with personal satisfactionhanded out by recruiters at job fairs, dozens of beaming co-op employees are shown at work and at play. I can find no discussion of the hourly pay scale, but there are lots of photos and words paying homage to the company's laid-back atmosphere, flexible work policies, and dedication to community service.

Charles Kapise, posed at an REI loading dock, his tattooed arms folded over his chest, sums up the recruiting advertisement's glowing message: "I'd really like to keep my job at REI as long as I canmaybe forever."

THERE IS ANOTHER kind of REI worker, different from the smiling crew in the glossy brochure; that is, former employees who were either fired or left of their own volition, all with a bad taste in their mouths. These people tell a consistent storyof a company culture increasingly focused on sales at the cost of service.

Rebecca Rundquist, an attorney, went to work at REI's Seattle flagship store during the late 1990s, hoping "to find an interesting and educational job that allowed me to do quality environmental legal work on a volunteer basis during my free time." What she found instead was "a new, corporate priority," with an emphasis on sales.

"I knew REI was no longer a co-op when employees started getting a bonus every time a customer opened a credit card account. The incentives given from management to employees were clearly all about profit. I started to wonder why I wasn't just selling used cars or working at Nordstromthere was no difference."Rundquist quit her job after less than a year.

More evidence of a profound change in the corporate culture is contained in a blurb extolling the company's new sales-based incentive plan, on the back of the promotional brochure.

"REI has been seeing a transformation in its work culture over the past two years," the brochure proclaims. "It used to be that selling wasn't really high on the priority list of hourly employees. Just being around all the great gear and 'talking shop' with customers who came in were the 'charge' for many employees. But two years ago, REI decided to take the unusual step of spreading its incentive pay plan over virtually its entire workforce. . . .

"Suddenly, selling is critical. Hourly employees have learned that not asking for the sale is really a lack of service, as they're not helping the customer get totally outfitted so they can get the most from their outdoor adventure. Sales in the name of expert service."

"THAT'S ABSURD," says Tom Jones, the chairman of the management and organization department of the University of Washington's business school, reading the slick brochure's discussion of REI's new sales ethic. "Sometimes," Jones says, "the correct solution for a potential customer is that they buy nothing. 'We have nothing here that you're going to be happy with' is a perfectly reasonable thing to say by someone who regards the interest of the customer as paramount. In other words, you have to be prepared to walk away from business. . . . And when you shift to an incentive-based sales system, you have made that secondary or tertiary down the line, down the hill."

AT 65, REI IS A relative newbie compared to the cooperative movement itself, which celebrates its 159th anniversary this year. In 1844 in Rochdale, England, the Rochdale Society of Equitable Pioneers defined a set of valuesincluding open membership, democratic control, honest business practices, and advancement of the common goodupon which most modern co-ops, REI included, are based.

Some of the first U.S. cooperatives were an agrarian response to the tyranny of industrial capitalism; in the Pacific Northwest, the co-op movement came into its own in the aftermath of the Seattle General Strike of 1919, which shut down the city for six dayshelping earn the state its reputation as "the Soviet Republic of the state of Washington." Co-ops were in their heyday during the Great Depression; and when West Seattleite Lloyd Anderson was gouged by a local merchant on the purchase of a third-rate ice ax, it was only natural for the populist-minded mountaineer to seek an uncapitalistic solution. On June 23, 1938, Anderson, his wife, Mary, and four fellow progressives founded the Recreational Equipment Cooperative. Asked why he didn't just set up his own for-profit company, Anderson reportedly said, "I wouldn't want to make money off my friends."

Since those idealistic beginnings, some 6.4 million people have shelled out between $5 and $15 for a membership card, and the co-op, which remained under the direction of Lloyd and Mary Anderson through 1970, has since gone through a succession of chief executives. Those CEOsJim Whitaker, Jerry Horn, Wally Smith, and now Dennis Madsenhave led a steady march, without much looking back, away from the starry-eyed world of lofty, lefty cooperative principles and into the steely-eyed, bean-counting land of corporate America.

"What they are now," says one cynical member, "is a conglomerate in the guise of a grain elevator."

"CO-OP, CO-OP, CO-OP . . . that's only one part of a lot bigger operation that REI stands for," REI President and CEO Madsen, 54, says with a hint of impatience. "A co-op is just one dimension to who we are. We're a very large, complex organization. And to try to boil this down to co-op versus non-co-op is a little bit too myopic."

In 1966, at the age of 17, Madsen answered a Seattle Times ad for part-time work stocking shelves at REI. He's been employed by the company ever since, 37 years, including part-time employment while he earned his degree in mechanical engineering at Seattle Pacific University.

Madsen's official company biography lists his achievements as "developing REI's domestic and international mail-order operations, establishing its in-house advertising and marketing functions, directing its retail expansion," and integrating the company's retail, online, and catalog/phone operations into a single, exemplary "multichannel" selling unit.

If anyone can give me a handle on who owns REI, it is this guy. So I am pressing him to tell me how well traditional cooperative valueslike democracyhave survived the company's transformation into a behemoth corporation which must, by its very nature, keep a sharp eye on the bottom line. The ready smile and deep laugh brought by the tall, athletic CEO to the early part of this interview have all but vanished as we venture into an area that is clearly a chronic annoyance. Stillnaive, unbusiness-savvy co-op member that I am, I'm not quite prepared for his answer.

"We are a retailerfirst and foremost," and then a co-op, Madsen says. "Co-ops that forget that are the ones that tend to get into trouble and ultimately drift off into oblivion. The competitive marketplacethe retail marketplacewill not allow any retailer to focus on their organization first and their business second."

Madsen expands, emphatically: "I believe that to be true for traditionally structured public companies, private companies, or cooperatives. Once they let their ownership structure start to dictate what they need to do for the customer, that's the beginning of the end. And I've seen this happen over and over and over again."

Listening to Madsen relegate the cooperative part of the co-op to a backseat role, I am wondering now if there is room in this vehicle for any of the old-time values that came along with it. How much importance, I ask him, is placed on democracy at REI?

"Well, ultimately, because we are a cooperative and we're owned by our customers, they do have a huge impact on us." Because REI doesn't have to answer to investors intent on maximizing profits, Madsen says, the company is able to focus on the long termwhich ultimately benefits its members. "So they vote with their dollars and their traffic every single day. We know if we're doing a better or a worse job of attracting them and taking care of their needs and interests.

"So you know, in a sense, yeahwe are democratic. They vote with their dollars."

"MADSEN MAKES A common mistake when he places the concept of cooperative democracy within the context of the marketplace," says David Blanke, assistant professor of history at Texas A&M University in Corpus Christi. "The latter suggests that one can measure how well the general will is being served by sales volumes and the economic viability of a company. In short, to quote Marshall Field, if they 'give the lady what she wants,' then they are, by definition, democratic. By contrast, a founding principle of a consumer cooperative is democratic control over the institutions that offer consumer outlets."

In his book, Sowing the American Dream, a study of rural purchasing cooperatives and the mail-order firms of Montgomery Ward and Sears, Blanke argues that "democratic control is essential to a cooperative's unique reason for being: that of aiding individuals in their effort to construct a representative and, to them, ethical source of consumer wares. The benefits that flow from this are almost classically democratic: first the member, then society, and lastly the store and its directors and officers."

Madsen's view of co-op members as consumers, Blanke says, "does not figure into this concept of democratic control.

"Ultimately, democratic control is the sine qua non of a consumer cooperative."

CALL IT MANIFEST destiny, or call it a great marketing formula. Just as economics have dictated a business-first, cooperative-values-second philosophy, Madsen says, it has been the brutal competition of the outdoor-equipment retailing sector that has forced REI to grow and growleading, inexorably, to the company's current dominance.

In 1966, when he started working at the co-op, REI was a single store, housed in the funky old Bocker Building on Capitol Hill. A good portion of the company's annual sales was mail order, however, and much of that business came from Berkeley, Calif., where there were 10,000 card-carrying REI members. Madsen says the company faced a decision: build a second store in Berkeley or eventually lose those members to local competition. Over the strenuous objections of many Seattle members, REI store No. 2 opened in Berkeley on March 15, 1975.

The die was cast. Portland's Jantzen Beach store opened in 1976; Manhattan Beach, Calif., and Bloomington, Minn., in 1977; Anchorage in 1980and on and on at the rate of at least one store a year. At present, Madsen says, REI is actively looking in 24 markets around the country where there is potential for expansion. In theory, he says, the expansion must come to an end, but that end is not yet in sight. REI will change and evolve over time and might modify its marketing approach, so the company can continue to grow in a healthy way for years to come.

"Once growth stops in any kind of an organization," Madsen says, "it's a challenge to maintain the culture, the vitality, to be able to invest in the business, to stay in front of the customers. So, growth's a critical dimension for usreasoned, appropriate growth. Not massive growth, not just growing this thing as fast and as furiously as we can. Who would have dreamed 25 years ago that Starbucks could have created the kind of company they did?"

For those who believe you can't make a good omelette without cracking a few eggs, it might seem reasonable that one of the casualties of REI's steady growth has been that most essential principle of the old cooperative movement, democracy. Members have virtually no say over the way things are done today, and the co-op's monolithic, self-perpetuating board of directors has changed the organization's bylaws to make insurgency virtually impossible.

For the record, though, REI's members have never been all that interested in participating in their co-op. The only time the hoi polloi have gotten really worked up was 1980, when the board announced a record-low 5 percent dividend, fueling the birth of a short-lived dissident coalition.

So, perhaps it is understandable that over the years REI's board of directors and corporate officers have gotten used to doing business out of the public eye, accountable to no one but themselves. I might, in theory, be one of REI's owners, but the message I'm getting is that much of the company's business is none of my own. Or yours.

For example, really important goverance documents, such as the corporate bylaws and articles of incorporation, are not available on REI's Web site where members could easily look them over. I had to ask that copies be mailed to me, and it took two weeks for the co-op to deliver them. Then, when I asked to see how the documentsrule books for the democratic processhave been amended over the years, I was told that the records are not complete, that they are in the process of being archived, and they are not available for viewing. That request was in January. It's now the middle of June, and I still haven't seen the documents.

AT SOME point, REI's board of directors changed the bylaws to make it virtually impossible for anyone not of their choosing to join their ranks. These days, if you'd like to get onto the boardand you might, because its members are paid $15,000 a year, the chairman $20,000you must win the approval of its nominating committee, a subcommittee of the board. Failing that, you must gather the signatures of 1 percent of the co-op's active membershipabout 21,000 names. To make things just a little more challenging, the co-op won't let you even peek at the membership list, which they say is not released for privacy reasons.

But let's say you're stubborn and willing to stand outside an REI store and gather member signatures for six months or so. Your name will, indeed, be placed on the ballotclearly distinguishable from the board-nominated, board-endorsed candidates. In the words of a straight-faced corporate spokesperson, "the petition process sets a high threshold for those who wish to be placed on the ballot by petition, to ensure serious candidates."

Bill Britt, of Anchorage, in his second term as chairman of the board and its longest-serving member, was himself a successful petition candidate in 1982. Getting on the ballot back then, however, required the signatures of only 50 members. Sometime after thatprecisely when is buried in those archivesthe board upped the ante. Britt and two other incumbents appeared on this year's ballot, all unopposed. With "choices" like that, it is small wonder that the percentage of members voting each year has been declining steadily: 14 percent in 1980, 5 percent in 1999, 4.3 percent in 2000, 3.9 percent in 2001, 2.9 percent last year, and 2.8 percent this spring.

DENNIS MADSEN AND I are having a civil but strained go-round over REI's refusal to share financial information. I own one share in this co-op, and because publicly traded companies like Nordstrom and Weyerhaeuser are required by law to make such information public, I think I have a right to see this stuff.

Q: "You don't disclose certain financial information, such as executive compensation, which under law is freely disclosed for all publicly traded companies. It surprised me that in a company which is purportedly owned by consumers, that information is not available."

A: "We don't disclose any. . . . "

Q: "What's the rationale for that?"

A: "Why would we want to?"

Q: "Because we're democratic?"

A: "I guess we'll disagree on that one. I can't think there's any reason we want to disclose confidential information like thator about where the company is going or headed. . . . This is a highly competitive business, retailing is today. There are folks out there, across the nation, who are teeing up. The outdoor industry is the next thing that they want to go after. And for us to share sensitive information about the company to our competitors would compromise our ability to sustain this organization."

UW BUSINESS ethics professor Jones rolls his eyes when I tell him REI won't disclose how much its officers are being paid. "Does your tape recorder capture me rolling my eyes? You can say, 'Professor Jones rolled his eyes when he heard that lame excuse.'

"They don't want you to know how much they're making because they don't want it publicized. Is there any other reasonable conclusion to reach?"

Says David Ortman, executive director of the Northwest Corporate Accountability Project and a longtime REI member: "It is disturbing to learn that REI is unwilling to make its financial information available to its members and the public. The basic definition of a cooperative is that of a jointly owned and democratically controlled enterprise. That means a co-op such as REI must be accountable to its members and to the public."

"The most significant facts that investors have to judge a board by is how it pays management," says shareholder activist Bartlett Naylor, director of the Arlington, Va.-based Green Corporate Accountability Project and former chief investigative officer of the Senate Banking Committee.

"If consumers own a cooperative, they may not risk their savingsbut they play the role of owners in exercising control. In this way, basic information such as the financial health of a cooperative is central," says Naylor. "It should be complete and accessible. Lack of transparency can be fatal, as witnessed by the Enron scandal, where management took pains to shift significant liabilities 'off the balance sheet,' meaning they were unpublished to investors."

FOURTEEN YEARS AGO, the daily newspaper that employed me closed forever, in a situation similar to the current dispute between The Seattle Times and the Seattle Post-Intelligencer. While I looked for another writing job, I went to work for a short while at REI, giving customers information about camping equipment. One day, a middle- aged Swedish guy came into the department and struck up a conversation about cooperatives.

As a young man, the Swede said, his father had been a fervent member of that nation's cooperative movementconvinced that a noncapitalistic system of citizen-owned businesses could transform Sweden into an egalitarian paradise the rest of the world would emulate.

"My father died a bitter man," the Swede told me. "His dreams were broken, his hopes for a better world crushed. Too late in life, he had come to believe that in the end cooperatives are run not for the benefit of the citizens, but for the benefit of the managers."

I am thinking about the Swede's words as I talk on the phone with Dr. Bruce Amundson, 64, a nationally known expert on rural health. Amundson grew up in the Midwest, in a family with strong ties to the cooperative movement; and the fact that REI was a co-op was a strong factor in his decision, 30 years ago, to join. An avid backpacker and outdoorsman, Amundson had not been much concerned about the management of REI. That is, until the company closed its Seattle garment manufacturing facility in 2000 and moved the work to Mexico, where the wages were a fraction of those in the U.S.

The company argued it was all a matter of economics; U.S. labor was just too expensive when compared with Mexico and Asia. REI requires foreign manufacturers to ensure workers' rights, health, and safety and to pay top wages. Factory conditions are checked before orders are placed, and third-party monitors hired to ensure continuing compliance.

But Amundson didn't buy it.

"I felt that it was very much antagonistic to the cooperative movement to be removing jobs from the community in which the co-op was birthed and continues to exist as corporate headquarters, when an important principle for cooperatives is to support and strengthen the local economy," Amundson recalls.

"It struck me that our cooperative was not behaving any better than much of the corporate world of the Nikes and the Wal-Marts, to seek the cheapest labor. The company ethics that I saw demonstrated were really no better than much of the current corporate values, which are participating in the rush to the bottom.

"I believe it is possible for cooperatives to lose their pathand I believe REI has come precious close to that."

Andy Ryan is a freelance writer who lives in Kenmore. He is a former owner of Kent-based Recreational Equipment Inc. He can be reached at andy.ryan@verizon.net.